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Dischargeability of Tax Debt

Section 523(a) of the Bankruptcy Code

(a) A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt- (1) for a tax or a customs duty-
(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, or equivalent report or notice, if required- (i) was not filed or given; or
(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

11 U.S.C. § 523(a)(1). The exception under § 523(a)(1)(A) excepts from discharge any tax debt or unsecured claim(s) of the government that is entitled to priority status pursuant to § 507(a)(8).

Priority status is afforded to claims for, among other things, income taxes attributable to the tax years for which a return was due within three years prior to the filing of the bankruptcy case. 11 U.S.C. § 507(a)(8) provides in pertinent part as follows:

(a) The following expenses and claims have priority in the following order:
. . .
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for-
(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition-
(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition[.]
11 U.S.C. § 507(a)(8)(A)(i).

Dischargeability of Penalties under § 523(a)(7)

11 U.S.C. § 523(a)(7) further provides that:

(a) A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt- . . .
(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty-
(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or
(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition[.]

Interest on the Nondischargeable Tax Claim

Pre-petition interest is nondischargeable when it relates to an otherwise nondischargeable tax debt. See Cinquegrani v. United States (In re Cinquegrani), 1993 Bankr. LEXIS 985 (Bankr. N.D.Ill. 1993); In re Garcia, 955 F.2d 16 (5th Cir. 1992); Burns v. United States (In re Burns), 887 F.2d 1541 (11th Cir. 1989); In re Hanna, 872 F.2d 829 (8th Cir. 1989); and In re Larson, 862 F.2d 112 (7th Cir. 1988). Furthermore, the Supreme Court in Bruning v. United States, 376 U.S. 358 (1964), held that post-petition interest on an unpaid nondischargeable tax debt continues to be a personal liability of the debtor after bankruptcy. “[T]he government may recover post-petition interest on nondischarged debts for taxes regardless of whether the underlying debt has been paid or not.” United States v. River Coal Co., 748 F.2d 1103, 1107 (6th Cir. 1984). In this case, there remains, among other things, unpaid post-petition interest on the taxes and unpaid pre-petition and post-petition interest on penalties relating to the Priority Claim. As the Court has concluded that the Priority Claim is a nondischargeable debt, the interest related to same is also nondischargeable.

Effect of Confirmation of the Plan of Reorganization

Priority Claim are Nondischargeable

The effect of confirmation is governed by 11 U.S.C. § 1141 and provides in pertinent part as follows:

(a) Except as provided in subsections (d)(2) and (d)(3) of this section, the provisions of a confirmed plan bind the debtor, . . . and any creditor, . . . whether or not the claim or interest of such creditor . . . is impaired under the plan and whether or not such creditor . . . has accepted the plan.
. . .
(d)(2) A discharge under this chapter does not discharge a debtor who is an individual from any debt excepted from discharge under section 523 of this title.

11 U.S.C. § 1141(a) and (d)(2). Although a confirmed plan generally binds a creditor to the treatment as provided in the plan, a debt that is excepted from discharge under § 523 will survive issuance of the debtor’s discharge, and the creditor entitled to payment of its nondischargeable debt may pursue collection of same upon the completion of the debtor’s plan. “[T]he confirmation of a plan of reorganization does not fix tax liabilities made nondischargeable under 11 U.S.C. § 523.” In re Gurwitch, 794 F.2d 584, 585 (11th Cir. 1986). In re Sprout (Bankr. S.D. Ohio 2021)

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